A year end PRPP update

On Nov. 17 the House of Commons introduced the much-anticipated Bill C-25 Pooled Registered Pension Plans (PRPP) Act.  This update was provided by Great-West Life in their efforts to support the PRPP initiative.

Great-West Life welcomes the introduction of the PRPP. We support the federal government’s commitment to address the meaningful retirement concerns of millions of working Canadians by ensuring they have access to workplace retirement savings plans. We’re hopeful that the PRPP will turn out to be a useful vehicle to help employees of smaller employers gain access to this important benefit.

We’ve been actively involved in the retirement savings reform debate. Our focus has been to introduce relevant facts and research regarding the current state of the retirement system in Canada into the discussion, along with suggestions on how to address the primary concerns about the adequacy of Canadians’ retirement savings. We will continue to be involved.

The draft legislation is a start but much depends on the regulations that have yet to be drafted. As well, to offer a PRPP each province must enact its own legislation so many questions remain to be answered.

We’ll keep you informed as more information is released, but in the meantime, here are some details:

What’s a PRPP?

The PRPP is a new type of savings plan for Canadians, similar to a defined contribution (DC) registered pension plan. The PRPP’s goal is to provide low-cost retirement savings opportunities for smaller employers, self-employed individuals, and employees of companies that don’t have plans.

PRPPs should benefit Canadians by making pension coverage more broadly available:

  • The PRPP provides a plan structure to pool smaller employers’ assets together to allow the plan to benefit from economies of scale.
  • The PRPP structure is administratively attractive to sponsoring employers as a majority of the complex pension administration will be performed by the Administrator.
  • Effective retirement saving requires that employees keep their contributions in the plan so they can benefit from tax-effective compound growth. The PRPP proposes a pension structure which requires locking in of contributions.
  • The auto-enrolment and auto-escalation features proposed under the PRPP will promote higher retirement savings participation and savings rates.

High level summary of the federal PRPP:

  • This act only applies to employers in federally regulated jurisdictions (e.g. banking, extra-provincial transport, aircraft transport, etc.) but is intended to serve as a template for provincial legislation that will apply to all other employers.
  • It is applicable to federally regulated PRPPs registered with the Office of the Superintendent of Financial Institutions Canada (OSFI).
  • PRPP Administrators will have to apply to be licensed.
  • Employers with employees in included employment (as defined in the act) are eligible to participate in a federal PRPP. Employed individuals working in the territories are also eligible to participate in a federal PRPP (including the self-employed and persons working in included employment where their employer does not participate in a PRPP).
  • For employers who choose to participate it contains auto-enrolment, but members can opt out for any reason within 60 days of receiving notice of the plan.
  • Employer contributions are not mandatory.
  • The Administrator sets the contribution rates and any increases to them.
  • Administrators of PRPPs will need to be licensed with the Superintendent.
  • Electronic communications are allowed as long as certain provisions are met.
  • What is required to be communicated to members will be defined in the regulations.
  • The Administrator must administer the plan and assets as a trustee for the members.
  • The Administrator’s standard of care is that of a reasonably prudent person.
  • Funds are locked in (with a few exceptions).
  • The plan can allow for variable payments out (if/when members reach an age not yet determined).
  • The Administrator and employer need to enter into a contract. Fuller details of what the contract must contain will be set out in regulations.
  • The contract must provide details on the amount and timing of contributions to the Administrator and the consequences of failure to comply with the provisions. The Administrator must advise the Superintendent if the employer doesn’t comply.
  • The Administrator must provide the plan at a low cost. (The regulations may establish criteria for determining this.)
  • The Administrator must not give, offer or agree to give or offer an inducement to an employer to enter into a contract regarding the PRPP. Employers are prohibited from seeking or accepting any inducement.

Before this act can become a reality:

  • Tax rules will need to be applied.
  • Individual provinces will be responsible for introducing their own provincial acts.
  • The bill will need to be finalized and enacted. Further hearings are expected in January 2012.
  • Regulations clarifying many details will need to be written and released.
  • Several other federal acts will need to be amended to allow for certain provisions of Bill C-25.

Great-West Life will continue to provide updates as this concept progresses.

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites JimYih.com and Clearpoint Benefit Solutions.

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